Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-707
KANSAS CITY POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
Missouri 44-0308720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Walnut, Kansas City, Missouri 64106-2124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 556-2200
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock at
November 7, 2001, was 61,872,810 shares.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Balance Sheets
(Unaudited)
September 30 December 31
2001 2000
(thousands)
ASSETS
Current Assets
Cash and cash equivalents $ 27,937 $ 34,877
Receivables 221,625 115,356
Equity securities 283 18,597
Fuel inventories, at average cost 20,050 20,802
Materials and supplies, at average cost 48,827 46,402
Deferred income taxes 4,105 737
Other 15,856 14,455
Total 338,683 251,226
Nonutility Property and Investments
Telecommunications property 386,246 -
Affordable housing limited partnerships 87,121 98,129
Gas property and investments 35,323 47,654
Nuclear decommissioning trust fund 59,134 56,800
Other 63,027 81,624
Total 630,851 284,207
Utility Plant, at Original Cost
Electric 4,197,174 3,832,655
Less-accumulated depreciation 1,761,065 1,645,450
Net utility plant in service 2,436,109 2,187,205
Construction work in progress 92,359 309,629
Nuclear fuel, net of amortization
of $122,770 and $110,014 24,463 30,956
Total 2,552,931 2,527,790
Deferred Charges
Regulatory assets 133,610 139,456
Prepaid pension costs 82,392 68,342
Goodwill 98,637 11,470
Other deferred charges 16,897 11,400
Total 331,536 230,668
Total $ 3,854,001 $ 3,293,891
LIABILITIES AND CAPITALIZATION
Current Liabilities
Notes payable $ 22,440 $ -
Commercial paper 193,248 55,600
Current maturities of long-term debt 367,842 93,645
Accounts payable 134,086 158,242
Accrued taxes 76,997 14,402
Accrued interest 15,468 12,553
Accrued payroll and vacations 24,160 28,257
Accrued refueling outage costs 10,526 1,890
Other 51,101 14,877
Total 895,868 379,466
Deferred Credits and Other Liabilities
Deferred income taxes 604,397 590,220
Deferred investment tax credits 46,820 50,037
Deferred telecommunications revenue 45,595 -
Accrued nuclear decommisioning costs 60,401 57,971
Other 72,220 63,936
Total 829,433 762,164
Capitalization (see statements) 2,128,700 2,152,261
Commitments and Contingencies (Note 4)
Total $ 3,854,001 $ 3,293,891
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
1
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Capitalization
(Unaudited)
September 30 December 31
2001 2000
(thousands)
Long-term Debt (excluding current maturities)
General Mortgage Bonds
Medium-Term Notes due 2003-08,
7.28% and 7.18%, weighted-average rate $ 179,000 $ 206,000
3.37%* Environmental Improvement Revenue
Refunding Bonds due 2012-23 158,768 158,768
Senior Notes
7.125% due 2005 250,000 250,000
Unamortized discount (467) (550)
Medium-Term Notes
6.69%** due 2002 - 200,000
Environmental Improvement Revenue Refunding Bonds
3.25%* Series A & B due 2015 106,500 106,500
4.50%* Series C due 2017 50,000 50,000
3.25%* Series D due 2017 40,000 40,000
Subsidiary Obligations
Senior Discount Notes
12.5% due 2008 200,443 -
Unamortized discount (1,830) -
R.S. Andrews Enterprises, Inc. long-term debt
8.27% weighted-average rate due 2002-07 2,628 -
Affordable Housing Notes
8.15% and 8.29%, weighted-average rate 20,333 31,129
due 2003-08
Total 1,005,375 1,041,847
Company-obligated Mandatorily Redeemable
Preferred Securities of a trust holding solely
KCPL Subordinated Debentures 150,000 150,000
Cumulative Preferred Stock
$100 Par Value
3.80% - 100,000 shares issued 10,000 10,000
4.50% - 100,000 shares issued 10,000 10,000
4.20% - 70,000 shares issued 7,000 7,000
4.35% - 120,000 shares issued 12,000 12,000
$100 Par Value - Redeemable
4.00% - 62
Total 39,000 39,062
Common Stock Equity
Common stock-150,000,000 shares authorized
without par value 61,908,729 shares issued,
stated value 449,697 449,697
Retained earnings (see statements) 499,739 473,321
Accumulated other comprehensive income
Loss on derivative hedging instruments (13,455) -
Capital stock premium and expense (1,656) (1,666)
Total 934,325 921,352
Total $ 2,128,700 $ 2,152,261
* Variable rate securities, weighted-average rate as of September 30, 2001
** Variable rate securities, weighted-average rate as of December 31, 2000
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
2
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
(thousands)
Operating Revenues
Electric sales revenues $ 471,863 $ 361,396 $1,048,261 $ 827,850
Gas sales revenues (465) 16,043 16,641 37,905
Telecommunications revenues 4,528 - 11,520 -
Other revenues 16,717 925 52,410 2,868
Total 492,643 378,364 1,128,832 868,623
Operating Expenses
Fuel 52,533 54,149 124,836 119,334
Purchased power 142,103 69,463 298,750 141,098
Gas purchased and production expenses 339 11,198 17,454 21,760
Other 78,304 69,501 243,163 183,859
Maintenance 18,835 17,258 60,588 55,775
Depreciation and depletion 40,424 34,242 117,046 99,325
Gain on property (463) (46,975) (22,169) (50,665)
General taxes 28,839 27,342 74,253 70,637
Total 360,914 236,178 913,921 641,123
Operating income 131,729 142,186 214,911 227,500
Loss from equity investments (389) (2,444) (501) (18,684)
Other income and expenses (20,832) (274) (21,363) (9,789)
Interest charges 28,645 20,407 78,481 56,775
Income before income taxes, extraordinary
item and cumulative effect of changes
in accounting principles 81,863 119,061 114,566 142,252
Income taxes 26,331 37,443 25,774 33,319
Income before extraordinary item and
cumulative effect of changes in
accounting principles 55,532 81,618 88,792 108,933
Early extinguishment of debt,
net of income taxes - - 15,872 -
Cumulative effect to January 1, 2000,
of changes in accounting principles,
net of income taxes - - - 30,073
Net income 55,532 81,618 104,664 139,006
Preferred stock dividend requirements 412 412 1,236 1,236
Earnings available for common stock $ 55,120 $ 81,206 $ 103,428 $ 137,770
Average number of common shares outstanding 61,870 61,846 61,860 61,869
Basic and diluted earnings per common share
before extraordinary item and cumulative
effect of changes in accounting principles $ 0.89 $ 1.31 $ 1.41 $ 1.74
Early extinguishment of debt - - 0.26 -
Cumulative effect to January 1, 2000, of
changes in accounting principles - - - 0.49
Basic and diluted earnings per common share $ 0.89 $ 1.31 $ 1.67 $ 2.23
Cash dividends per common share $ 0.415 $ 0.415 $ 1.245 $ 1.245
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
Year to Date September 30 2001 2000
(thousands)
Cash Flows from Operating Activities
Net income $ 104,664 $ 139,006
Adjustments to reconcile income to net cash
from operating activities:
Early extinguishment of debt, net of income taxes (15,872) -
Cumulative effect of changes in
accounting principles, net of income taxes - (30,073)
Depreciation and depletion 117,046 99,325
Amortization of:
Nuclear fuel 12,757 12,725
Other 12,892 8,992
Deferred income taxes (net) 3,634 (18,830)
Investment tax credit amortization (3,217) (3,353)
Accretion of Senior Discount Notes (net) 11,083 -
Loss from equity investments 501 18,684
Gain on sale of KLT Gas properties (20,137) (60,413)
Asset impairments - 16,099
Allowance for equity funds
used during construction (3,551) (3,090)
Other operating activities (Note 1) (81,180) 42,374
Net cash from operating activities 138,620 221,446
Cash Flows from Investing Activities
Utility capital expenditures (154,743) (325,004)
Allowance for borrowed funds
used during construction (8,404) (8,682)
Purchases of investments (40,693) (53,575)
Purchases of nonutility property (47,812) (18,069)
Sale of KLT Gas Properties 42,293 36,925
Sale of securities 21,779 -
Hawthorn No. 5 partial insurance recovery 30,000 50,000
Loan to DTI prior to majority ownership (94,000) -
Other investing activities 6,984 18,191
Net cash from investing activities (244,596) (300,214)
Cash Flows from Financing Activities
Issuance of long-term debt 99,500 294,000
Repayment of long-term debt (63,366) (108,000)
Net change in short-term borrowings 144,731 (16,574)
Dividends paid (78,246) (78,256)
Other financing activities (3,583) (6,527)
Net cash from financing activities 99,036 84,643
Net Change in Cash and Cash Equivalents (6,940) 5,875
Cash and Cash Equivalents at Beginning of Year 34,877 13,073
Cash and Cash Equivalents at End of Period $ 27,937 $ 18,948
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
(thousands)
Net income $ 55,532 $ 81,618 $ 104,664 $ 139,006
Other comprehensive income (loss):
Loss on derivative
hedging instruments (5,537) - (39,705) -
Income tax benefit 2,287 - 16,494 -
Net loss on derivative
hedging instruments (3,250) - (23,211) -
Reclassification to revenues
and expenses, net of tax 653 - (7,687) 2,337
Comprehensive income before
cumulative effect of a
change in accounting
principles, net of
income taxes 52,935 81,618 73,766 141,343
Cumulative effect to
January 1, 2001, of a
change in accounting
principles, net of
income taxes - - 17,443 -
Comprehensive Income $ 52,935 $ 81,618 $ 91,209 $ 141,343
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Consolidated Statements of Retained Earnings
(Unaudited)
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
(thousands)
Beginning balance $ 470,289 $ 424,163 $ 473,321 $ 418,952
Net income 55,532 81,618 104,664 139,006
525,821 505,781 577,985 557,958
Dividends declared
Preferred stock -
at required rates 411 412 1,235 1,236
Common stock 25,671 25,667 77,011 77,020
Ending balance $ 499,739 $ 479,702 $ 499,739 $ 479,702
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
5
KANSAS CITY POWER & LIGHT COMPANY
CERTAIN FORWARD-LOOKING INFORMATION
Statements made in this report that are not based on historical facts
are forward-looking, may involve risks and uncertainties, and are
intended to be as of the date when made. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of
1995, the Company is providing a number of important factors that
could cause actual results to differ materially from provided forward-
looking information. These important factors include:
- - future economic conditions in the regional, national and
international markets
- - state, federal and foreign regulation
- - weather conditions
- - cost of fuel
- - financial market conditions, including, but not limited to changes
in interest rates
- - inflation rates
- - increased competition, including, but not limited to, the
deregulation of the United States electric utility industry, and the
entry of new competitors
- - ability to carry out marketing and sales plans
- - ability to achieve generation planning goals and the occurrence of
unplanned generation outages
- - nuclear operations
- - ability to enter new markets successfully and capitalize on growth
opportunities in nonregulated businesses
- - adverse changes in applicable laws, regulations or rules governing
environmental including air quality regulations, tax or accounting
matters
- - delays in the anticipated in service dates of new generating
capacity
- - market conditions in the telecommunications industry
- - other risks and uncertainties
THE COMPANY
Effective October 1, 2001, the Company completed its corporate
reorganization creating a holding company structure. Great Plains
Energy Incorporated became the holding company of Kansas City Power &
Light Company (KCPL), Great Plains Power Incorporated (GPP) and KLT
Inc.
Through September 30, 2001, the date of these reports, the
consolidated company (referred to throughout as consolidated or the
Company) consisted of KCPL, KLT Inc., GPP, and Home Service Solutions
Inc. (HSS). KLT Inc.'s major holdings consisted of DTI Holdings, Inc.
and subsidiaries, including Digital Teleport, Inc. (DTI), Strategic
Energy LLC (SEL), KLT Gas, and investments in affordable housing
limited partnerships. HSS had two subsidiaries: Worry Free Service,
Inc. and R.S. Andrews Enterprises, Inc. (RSAE).
6
Notes to Consolidated Financial Statements
In management's opinion, the consolidated interim financial statements
reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for
the interim periods presented. These statements and notes should be
read in connection with the financial statements and related notes
included in our 2000 annual report on Form 10-K.
1. SUPPLEMENTAL CASH FLOW INFORMATION (a)
Year to Date September 30
2001 2000
(thousands)
Cash flows affected by changes in:
Receivables $(101,179) $ (54,142)
Fuel inventories 752 2,831
Materials and supplies (2,425) (991)
Accounts payable (61,674) 29,821
Accrued taxes 60,157 75,287
Accrued interest 2,873 (6,507)
Wolf Creek refueling outage accrual 8,636 4,013
Pension and postretirement
benefit obligations (17,997) (10,706)
Other 29,677 2,768
Total other operating activities $ (81,180) $ 42,374
Cash paid during the period for:
Interest $ 61,984 $ 61,591
Income taxes $ 7,822 $ 8,370
During the first quarter of 2001, KLT Telecom increased its equity
ownership in DTI to a majority ownership and HSS increased its equity
ownership in RSAE to a majority ownership. The effect of these
transactions is summarized in the tables that follow (b).
DTI RSAE Total
(thousands)
Cash paid to obtain majority ownership $ (39,855) $ (560) $ (40,415)
ownership
Subsidiary cash 4,557 1,053 5,610
Purchases of subsidiaries,
net of cash received $ (35,298) $ 493 (34,805)
Purchases of other investments
through September 30, 2001 (5,888)
Total purchases of investments $ (40,693)
7
DTI at RSAE at
February 8 January 1
2001 2001
Initial consolidation of subsidiaries: (thousands)
Assets
Cash $ 4,557 $ 1,053
Receivables 1,012 4,078
Other nonutility property and investments 363,825 6,267
Goodwill 62,974 24,496
Other assets 5,143 3,919
Eliminate equity investment (67,660) (7,200)
Total assets $ 369,851 $ 32,613
Liabilities
Notes payable $ 5,300 $ 10,057
Accounts payable 31,299 6,219
Accrued taxes 2,414 24
Deferred income taxes 7,437 -
Deferred telecommunications revenue 41,522 -
Other liabilities and deferred credits 5,009 13,418
Loan from KLT Telecom (c) 94,000 -
Long-term debt 182,870 2,895
Total liabilities $ 369,851 $ 32,613
(a) The initial consolidations of DTI and RSAE are not reflected
in the Consolidated Statement of Cash Flows year to date September
30, 2001.
(b) Additional adjustments to purchase accounting may be made.
(c) KLT Telecom provided a $94 million loan to DTI for the
completion of the tender offer of 50.4 percent of DTI's Senior
Discount Notes prior to increasing its DTI investment to a
majority ownership. This loan is eliminated in consolidation.
Sale of KLT Gas properties in September 2000:
(thousands)
Cash proceeds $ 36,925
Equity securities 106,000
Receivable 2,463
Total 145,388
Property (58,814)
Accounts payable (15,409)
Other assets and liabilities (10,752)
Gain on sale before tax $ 60,413
KLT Gas Inc. sold producing natural gas properties to Evergreen
Resources, Inc. (Evergreen) in two parts with the first part closed in
September 2000 (total proceeds of $145 million).
8
2. CAPITALIZATION
KCPL Financing I (Trust) has previously issued $150,000,000 of 8.3%
preferred securities. The sole asset of the Trust is the $154,640,000
principal amount of 8.3% Junior Subordinated Deferrable Interest
Debentures, due 2037, issued by KCPL.
KCPL is authorized to issue an additional $150 million of debt
securities under its shelf registration statement dated November 21,
2000. KCPL plans an issuance of these debt securities in the fourth
quarter of 2001.
DTI's Senior Discount Notes are senior unsecured obligations of DTI.
The discount on the Senior Discount Notes accrues from the date of the
issue until March 1, 2003, at which time interest on the Senior
Discount Notes accrues at a rate of 12.5% per year. Cash interest is
payable semi-annually in arrears on March 1 and September 1,
commencing September 1, 2003.
During the third quarter 2001, KCPL remarketed $48.3 million of its
$158.8 million variable rate environmental improvement revenue
refunding general mortgage bonds due 2012-23 at a fixed rate of 3.90%
through August 31, 2004. KCPL also remarketed its series A and B due
2015 and series D due 2017 environmental improvement revenue refunding
bonds at a fixed rate of 3.25% through August 29, 2002. Series C due
2017 has a fixed rate of 4.50% through August 31, 2003.
On October 3, 2001, GPE entered into a $110 million bridge revolving
credit facility with tiered pricing based on the credit rating of
GPE's unsecured long-term debt securities that terminates on February
28, 2002. GPE drew down $101 million on October 3, of which $100
million was loaned to KLT. KLT used the proceeds to pay off its
outstanding long-term bank credit agreement (the balance of $99.5
million is reflected in current maturities of long-term debt on the
Consolidated Balance Sheet at September 30, 2001). After the payoff,
KLT terminated its bank credit agreement.
3. SEGMENT AND RELATED INFORMATION
The Company's reportable segments include KCPL, KLT Inc. and HSS.
KCPL includes the regulated electric utility, GPP's operations
(immaterial through September 30, 2001) and unallocated corporate
charges. KLT Inc. and HSS are holding companies for various
unregulated business ventures.
The summary of significant accounting policies applies to all of the
segments. The Company evaluates performance based on several factors
including net income. The Company eliminates all intersegment sales
and transfers. The tables below reflect summarized financial
information concerning the Company's reportable segments.
9
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
KCPL (millions)
Operating revenues $ 323.2 $ 324.3 $ 759.6 $ 742.7
Fuel expense (52.5) (54.1) (124.8) (119.3)
Purchased power expense (21.1) (43.0) (59.1) (78.6)
Other (a) (93.1) (104.3) (280.1) (285.2)
Depreciation and depletion (34.4) (31.7) (100.9) (91.9)
Gain (loss) on property (0.1) 0.8 (0.2) 3.6
Other income and expenses (3.9) (3.7) (7.5) (8.3)
Interest charges (21.6) (16.4) (59.3) (45.6)
Income taxes (36.9) (28.0) (47.0) (45.8)
Cumulative effect of changes in
pension accounting - - - 30.1
Net income $ 59.6 $ 43.9 $ 80.7 $ 101.7
KLT Inc.
Operating revenues $ 152.8 $ 53.0 $ 317.2 $ 123.0
Purchased power expense (121.1) (26.5) (239.7) (62.5)
Other (a) (17.5) (19.3) (60.3) (42.6)
Depreciation and depletion (5.5) (2.0) (14.3) (6.0)
Gain on property 0.6 59.6 23.7 60.5
Income (loss) from equity investment (0.4) 0.2 (0.4) (13.3)
Other income and expenses (17.1) 3.3 (17.2) (2.3)
Interest charges (6.7) (4.0) (18.1) (11.2)
Income taxes 11.2 (16.1) 20.9 4.4
Early extinguishment of debt - - 15.9 -
Net income (loss) $ (3.7) $ 48.2 $ 27.7 $ 50.0
HSS
Operating revenues $ 16.6 $ 1.0 $ 52.0 $ 2.9
Other (a) (15.7) (1.7) (55.1) (4.3)
Depreciation and depletion (0.5) (0.5) (1.8) (1.4)
Loss on property - (13.4) (1.3) (13.4)
Loss from equity investments - (2.7) (0.1) (5.4)
Other income and expenses 0.3 0.1 3.4 0.8
Interest charges (0.4) - (1.1) -
Income taxes (0.6) 6.7 0.3 8.1
Net loss $ (0.3) $ (10.5) $ (3.7) $ (12.7)
10
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
Consolidated (millions)
Operating revenues $ 492.6 $ 378.3 $1,128.8 $ 868.6
Fuel expense (52.5) (54.1) (124.8) (119.3)
Purchased power expense (142.2) (69.5) (298.8) (141.1)
Other (a) (126.3) (125.3) (395.5) (332.1)
Depreciation and depletion (40.4) (34.2) (117.0) (99.3)
Gain on property 0.5 47.0 22.2 50.7
Loss from equity investments (0.4) (2.5) (0.5) (18.7)
Other income and expenses (20.7) (0.3) (21.3) (9.8)
Interest charges (28.7) (20.4) (78.5) (56.8)
Income taxes (26.3) (37.4) (25.8) (33.3)
Early extinguishment of debt and
cumulative effect of changes in
pension accounting - - 15.9 30.1
Net income $ 55.6 $ 81.6 $ 104.7 $ 139.0
(a) Other includes gas purchased and production expenses, telecommunications
expenses, other operating, maintenance and general tax expense.
September 30 KCPL KLT Inc. HSS Consolidated
2001 (millions)
Assets $3,065.3 $ 733.6(b) $ 55.1 $3,854.0
Net equity method
investments (c) - - - -
Year to date capital and 158.5 85.0 (0.3) 243.2
investments expenditures
2000
Assets $ 2,952.0 $ 381.5 $ 27.9 $3,361.4
Net equity method
investments (c) - 24.7 8.0 32.7
Year to date capital and
investments expenditures 328.8 67.7 0.1 396.6
(b) Includes assets associated with DTI of $454 million and SEL of
$114 million.
(c) Excluding affordable housing limited partnerships.
11
The following table provides additional detail on the operations of the KLT
Inc. segment.
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
DTI (a) (millions)
Operating revenues $ 4.6 - $ 11.6 -
Other (6.9) - (17.5) -
Depreciation and depletion (5.0) - (12.6) -
Loss from equity investments - - - $ (14.0)
Other income and expenses 0.2 - 1.2 -
Interest charges (4.8) - (11.8) -
Income taxes 4.1 - 10.3 5.1
Early extinguishment of debt - - 15.9 -
Net loss $ (7.8) - $ (2.9) $ (8.9)
SEL (a)
Operating revenues $ 148.7 $ 43.0 $ 304.2 $ 94.5
Purchased power expense (121.1) (26.5) (239.7) (62.5)
Other (6.7) (9.3) (29.8) (18.6)
Depreciation and depletion (0.1) (0.1) (0.2) (0.3)
Income from equity investments - - - 0.1
Other income and expenses (3.7) (2.2) (4.9) (4.3)
Interest charges - (0.1) (0.1) (0.2)
Income taxes (7.1) (1.8) (12.2) (3.3)
Net income $ 10.0 $ 3.0 $ 17.3 $ 5.4
KLT Gas
Operating revenues $ (0.5) $ 10.0 $ 1.4 $ 28.5
Other (2.3) (8.6) (8.3) (19.6)
Depreciation and depletion (0.4) (1.9) (1.4) (5.7)
Gain on property 0.6 59.7 21.5 58.3
Income from equity investments - 0.9 1.0 2.3
Other income and expenses 0.2 1.9 0.2 1.9
Interest charges - (1.4) - (3.5)
Income taxes 2.7 (19.6) (0.8) (16.2)
Net income $ 0.3 $ 41.0 $ 13.6 $ 46.0
Other
Other $ (1.6) $ (1.4) $ (4.7) $ (4.4)
Depreciation and depletion - - (0.1) -
Gain (loss) on property - (0.1) 2.2 2.2
Loss from equity investments (0.4) (0.7) (1.4) (1.7)
Other income and expenses (13.8) 3.6 (13.7) 0.1
Interest charges (1.9) (2.5) (6.2) (7.5)
Income taxes 11.5 5.3 23.6 18.8
Net income (loss) $ (6.2) $ 4.2 $ (0.3) $ 7.5
(a) KLT Inc. acquired a majority ownership in SEL during the second quarter of
2000 and in DTI in February 2001. Prior to this, the investments in SEL
and DTI were recorded on an equity basis. In the second quarter of 2000,
SEL was included in the Company's consolidated financial statements from
January 1, 2000, with the appropriate adjustments to minority interest
from January 1, 2000, through the date of the acquisition.
12
4. COMMITMENTS AND CONTINGENCIES
Environmental Matters
The Company operates in an environmentally responsible manner and uses
the latest technology available to avoid and treat contamination. The
Company continually conducts environmental audits designed to ensure
compliance with governmental regulations and to detect contamination.
However, governmental bodies may impose additional or more rigid
environmental regulations that could require substantial changes to
operations or facilities.
Mercury Emissions
In December 2000, The United States Environmental Protection
Agency (EPA) announced it would propose regulations to reduce
mercury emissions by 2003 and issue final rules by 2004. KCPL
cannot predict the likelihood or compliance costs of such
regulations.
Air Particulate Matter
In July 1997, the EPA published new air quality standards for
particulate matter. Additional regulations implementing these
new particulate standards have not been finalized. Without the
implementation regulations, the impact of the standards on KCPL
cannot be determined. However, the impact on KCPL and other
utilities that use fossil fuels could be substantial. Under the
new fine particulate regulations, the EPA is conducting a three-
year study of fine particulate emissions. Until this testing and
review period has been completed, KCPL cannot determine
additional compliance costs, if any, associated with the new
particulate regulations.
Nitrogen Oxide
In 1997, the EPA also issued new proposed regulations on reducing
nitrogen oxide (NOx) emissions. The EPA announced in 1998 final
regulations implementing reductions in NOx emissions. These
regulations initially called for 22 states, including Missouri,
to submit plans for controlling NOx emissions. The regulations
require a significant reduction in NOx emissions from 1990 levels
at KCPL's Missouri coal-fired plants by the year 2003.
In December 1998, KCPL and several other western Missouri
utilities filed suit against the EPA over the inclusion of
western Missouri in the 1997 NOx reduction program based upon the
1-hour NOx standard. On March 3, 2000, a three-judge panel of
the District of Columbia Circuit of the U.S. Court of Appeals
sent the NOx rules related to Missouri back to the EPA, stating
the EPA failed to prove that fossil plants in the western part of
Missouri significantly contribute to ozone formation in downwind
states. On March 5, 2001, the U.S. Supreme Court denied
certiorari, making the decision of the Court of Appeals final.
The full impact of this decision is unknown at this time;
however, it is likely to delay the implementation of new NOx
regulations by EPA in the western portion of Missouri for some
time.
To achieve the reductions proposed in the 1997 NOx reduction
program, if required to be implemented, KCPL would need to incur
significant capital costs, purchase power or purchase NOx
emissions allowances. It is possible that purchased power or
emissions allowances may be too costly. Preliminary analysis of
the regulations indicates that selective catalytic reduction
technology, as well as other changes, may be required for some of
the KCPL units. Currently, KCPL estimates that additional
capital expenditures to comply with these regulations could range
from $40 million to $60 million. Operations and maintenance
expenses could also increase by more than $2.5 million per year.
These capital expenditure estimates do not include the costs of
the new air quality control equipment installed at Hawthorn No.
5. The new air control equipment installed at Hawthorn No. 5
complies with
13
the proposed requirements discussed above. KCPL continues to
refine these preliminary estimates and explore alternatives.
The ultimate cost of these regulations, if any, could be
significantly different from the amounts estimated above.
Nuclear Insurance
As of November 15, 2001, Nuclear Electric Insurance Limited (NEIL),
the provider of some types of insurance for the Owners of Wolf Creek,
is increasing the potential retrospective assessments in its nuclear
insurance policies. If losses incurred at any of the nuclear plants
insured under the NEIL policies exceed premiums, reserves and other
NEIL resources, the company may be subject to retrospective
assessments under the amended NEIL policies of approximately $10.7
million per year. For additional information regarding our nuclear
insurance coverage, see Note 5 of the Notes to Consolidated Financial
Statements in our Annual Report on Form 10-K for the year ended
December 31, 2000.
Low-Level Waste
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated
that the various states, individually or through interstate compacts,
develop alternative low-level radioactive waste disposal facilities.
The states of Kansas, Nebraska, Arkansas, Louisiana and Oklahoma
formed the Central Interstate Low-Level Radioactive Waste Compact and
selected a site in northern Nebraska to locate a disposal facility.
Wolf Creek Nuclear Operating Corporation (WCNOC) and the owners of the
other five nuclear units in the compact provided most of the pre-
construction financing for this project. As of September 30, 2001,
KCPL's net investment on its books was $7.4 million.
Significant opposition to the project has been raised by Nebraska
officials and residents in the area of the proposed facility, and
attempts have been made through litigation and proposed legislation in
Nebraska to slow down or stop development of the facility. On
December 18, 1998, the application for a license to construct this
project was denied. This issue is being addressed in the courts. The
passage of time, along with the appointment of a new state
administration in Nebraska, has increased the chances for reversal of
the license denial.
In May 1999, the Nebraska legislature passed a bill withdrawing
Nebraska from the Compact. In August 1999, the Nebraska governor gave
official notice of the withdrawal to the other member states.
Withdrawal will not be effective for five years and will not, of
itself, nullify the site license proceeding.
Coal Contracts
KCPL's remaining share of coal purchase commitments under existing
contracts total $84.7 million. Obligations for the remainder of 2001
through 2003, based on estimated prices for those years, total $11.0
million, $54.5 million, and $19.2 million, respectively. These
amounts are net of purchases made year to date September 30, 2001.
5. RECEIVABLES
September 30 December 31
2001 2000
(thousands)
KCPL Receivable Corporation $ 74,175 $ 48,208
Other Receivables 147,450 67,148
Receivables $221,625 $115,356
14
Accounts receivable sold under the revolving agreement between KCPL
Receivable Corporation and KCPL totaled $134.2 million at September
30, 2001, and $108.2 million at December 31, 2000. In consideration
of the sale, KCPL received $60 million in cash and the remaining
balance in the form of a subordinated note from KCPL Receivable
Corporation.
Other receivables at September 30, 2001, consist primarily of
receivables from partners in jointly-owned electric utility plants,
bulk power sales receivables and accounts receivable held by
subsidiaries, including receivables of $91 million from SEL due to the
strong growth of their electric energy management business and the
increase to a majority ownership of DTI and RSAE (see Note 1 -
Supplemental Cash Flow Information).
6. DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133 - Accounting for Derivative
Instruments and Hedging Activities, as amended. SFAS 133 requires
that every derivative instrument be recorded on the balance sheet as
an asset or liability measured at its fair value and that changes in
the fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.
SFAS 133 requires that as of the date of initial adoption, the
difference between the fair market value of derivative instruments
recorded on the balance sheet and the previous carrying amount of
those derivatives be reported in net income or other comprehensive
income, as appropriate, as a cumulative effect of a change in
accounting principle. The adoption of SFAS 133 on January 1, 2001,
required the Company to record a $0.2 million expense, net of $0.1
million of income tax. The Company did not reflect this immaterial
amount as a cumulative effect. This entry increased interest expense
by $0.6 million and reduced purchased power expense by $0.3 million.
The Company also recorded $17.4 million, net of $12.6 million of
income tax, as a cumulative effect of a change in accounting principle
applicable to comprehensive income for its cash flow hedges.
Derivative Instruments and Hedging Activities
The Company's activities expose it to a variety of market risks
including interest rates and commodity prices. Management has
established risk management policies and strategies to reduce the
potentially adverse effects that the volatility of the markets may
have on its operating results.
The Company's interest rate risk management strategy uses derivative
instruments to minimize significant, unanticipated earnings
fluctuations caused by interest-rate volatility on a portion of its
variable rate debt. The Company maintains commodity-price risk
management strategies that use derivative instruments to minimize
significant, unanticipated earnings fluctuations caused by commodity
price volatility.
The Company's risk management activities, including the use of
derivatives, are subject to the management, direction and control of
Risk Management Committees.
Interest Rate Risk Management
KCPL utilizes interest rate management derivatives to reduce a portion
of KCPL's interest rate risk by converting a portion of its variable
interest rate payments into fixed interest rate payments.
In 2000, KCPL issued $200 million of unsecured, floating rate medium-
term notes. Simultaneously, KCPL entered into interest rate cap
agreements to hedge the interest rate risk on the notes. The cap
agreements are designated as cash flow hedges. The difference between
the fair market value
15
of the cap agreements recorded on the balance sheet at initial adoption
and the unamortized premium was reported in interest expense.
KCPL entered into interest rate swap agreements to limit the interest
rate on $30 million of long-term debt. These swaps do not qualify for
hedge accounting. The swap agreements mature in 2003 and effectively
fix the interest to a weighted-average rate of 3.88%. The fair market
values of these agreements are recorded as current assets and
liabilities and adjustments to interest expense on the income
statement. Changes in the fair market value of these instruments are
recorded in the income statement.
Commodity Risk Management
SEL utilizes an option and power swap agreements to hedge energy
prices in various markets. The option and a majority of the swap
agreements are designated as cash flow hedges.
The remaining swap agreements do not qualify for hedge accounting.
The fair market value of these swaps at January 1, 2001, was recorded
as an asset or liability on the balance sheet and an adjustment to the
cost of purchased power. The change in the fair market value and
future changes in the fair market values of these swaps will also be
recorded in purchased power.
The option allows SEL to purchase up to 270 megawatts of power at a
fixed rate of $21 per mwh. The swap agreements protect SEL from price
volatility by fixing the price per mwh. The fair market value of this
option and the swap agreements designated as cash flow hedges at
January 1, 2001, was recorded as a current asset and a cumulative
effect of a change in accounting principle in comprehensive income.
When the power is purchased and to the extent the hedge is effective
at mitigating the cost of purchased power, the amounts accumulated in
other comprehensive income are reclassified to the consolidated income
statement. However, most of the energy purchased under the option and
the energy hedged with the swaps has been sold to customers through
contracts at prices different than the fair market value used to value
the option and the swaps. Therefore, SEL will not receive income or
losses to the extent represented in comprehensive income in the
current or future periods. To the extent that the hedges are not
effective, the ineffective portion of the changes in fair market value
will be recorded directly to purchased power.
KLT Gas' risk management policy is to use firm sales agreements or
financial hedge instruments to mitigate its exposure to market price
fluctuations on up to 100% of its daily natural gas production. These
hedging instruments are designated as cash flow hedges. The fair
market value of these instruments at January 1, 2001, was recorded as
current assets and current liabilities, as applicable, and the
cumulative effect of a change in an accounting principle in
comprehensive income. When the gas is sold and to the extent the
hedge is effective at mitigating the impact of a change in the sales
price of gas, the amounts in other comprehensive income are
reclassified to the consolidated income statement. To the extent that
the hedges are not effective, the ineffective portion of the changes
in fair market value will be recorded directly in gas revenues.
KLT Gas unwound the majority of its gas hedge derivatives with a swap
transaction during the second quarter of 2001 primarily due to
declining production at its gas properties. This transaction does
not qualify for hedge accounting. The fair market value of the swap
has been recorded in gas revenues. Future changes in the fair market
value of this swap will also be recorded in gas revenues.
16
The amounts recorded related to the cash flow hedges are summarized
below.
Activity for three months ended September 30, 2001
Increase
(Decrease) in
June 30 Comprehensive September 30
Balance Sheet Classification 2001 Income Reclassified 2001
Assets (millions)
Other current assets $ 6.0 $ (3.1) $ (2.9) -
Liabilities
Other current liabilities (28.0) 8.8 4.2 $ (15.0)
Other comprehensive income 10.8 3.3 (0.7) 13.4
Deferred income taxes 7.5 2.3 (0.4) 9.4
Other deferred credits 3.7 (11.3) (0.2) (7.8)
Activity for year to date September 30, 2001
Cumulative Increase
Effect to (Decrease) in
January 1, Comprehensive September 30
Balance Sheet Classification 2001 Income Reclassified 2001
Assets (millions)
Other current assets $ 44.5 $(20.4) $(24.1) -
Liabilities
Other current liabilities (6.8) (15.6) 7.4 $ (15.0)
Other comprehensive income (17.4) 23.2 7.6 13.4
Deferred income taxes (12.7) 16.5 5.6 9.4
Other deferred credits (7.6) (3.7) 3.5 (7.8)
7. HSS PURCHASE OF AN ADDITIONAL OWNERSHIP INTEREST IN RSAE
On March 12, 2001, HSS acquired control of RSAE by acquiring an
additional 22.1% of the shares of RSAE for $0.6 million.
This acquisition has been accounted for by the purchase method of
accounting and the operating results of RSAE have been included in the
Company's consolidated financial statements from January 1, 2001, with
the appropriate adjustments to minority interest from January 1, 2001,
through the date of the acquisition. RSAE's September 30, 2001,
assets included $23.1 million of goodwill, which is being amortized
over 40 years. On a pro forma basis, as if the business had been
acquired at the beginning of fiscal 2000, revenue, net income and
earnings per share would not differ materially from the amounts
reported in the Company's year ended December 31, 2000, consolidated
financial statements.
8. KLT TELECOM INC. PURCHASE OF AN ADDITIONAL OWNERSHIP INTEREST IN
DTI
On February 8, 2001, KLT Telecom acquired control of DTI by acquiring
an additional 31.2% of the fully diluted shares of DTI from Richard D.
Weinstein, DTI's former Chairman, President and CEO, for $33.6 million
in cash. An additional 5.0% of the fully diluted shares were
purchased through a tender offer for DTI's outstanding warrants and
the purchase of a separate warrant for 1.0% of DTI's common stock.
Consequently, KLT Telecom now owns 83.6% of DTI's fully diluted
shares. Under the purchase agreement, Weinstein, who resigned as
Chairman, President and CEO, retained just over 15% of the fully
diluted ownership and a seat on the DTI board. Also, the parties
granted put
17
and call options that gave Weinstein the right to sell and KLT Telecom
the right to buy Weinstein's remaining ownership in DTI.
This acquisition has been accounted for by the purchase method of
accounting. Operating results were included in the Company's
consolidated financial statements from the date of the acquisition.
Goodwill of $63.0 million was recorded as a result of this acquisition
and is being amortized over 25 years. At September 30, 2001,
unamortized goodwill totaled $61.2 million.
Extraordinary Item - Early Extinguishment of Debt
The KLT Telecom gain on early extinguishment of debt year to date
September 30, 2001, resulted from DTI's completion of a successful
tender offer for 50.4 percent of its outstanding Senior Discount Notes
prior to KLT Telecom acquiring a majority ownership in DTI. The $15.9
million early extinguishment of debt has been reduced by the losses
previously recorded by DTI but not reflected by KLT Telecom, and is
net of $9.1 million of income taxes.
Telecommunications Property
DTI telecommunications property at September 30, 2001, of $383.3
million, is net of accumulated depreciation of $44.7 million and
consists mainly of fiber optic plant and usage rights. At September
30, 2001, telecommunications property included about $47 million of
construction work in progress.
Operating Leases and Indefeasible Rights to Use (IRU) Commitments
DTI is a lessee under operating leases and IRUs for fiber, equipment
space, maintenance, power costs and office space. Minimum rental
commitments under these agreements for 2001 are $8 million and $9
million annually for the years 2002 through 2005. After 2005,
cumulative minimum rental commitments under these agreements total
$136 million.
DTI Risk Factors
For a description of certain risk factors that may adversely affect
DTI's business and results of operations, see DTI's report on Form 10-
K for the six-month period ended December 31, 2000, filed on May 15,
2001, and DTI's quarterly report on Form 10-Q for the quarter ended
September 30, 2001.
DTI is actively exploring its strategic alternatives including a
merger, sale of assets, bankruptcy, and all other types of
recapitalization. DTI has not yet determined which alternative, or
combination thereof, it will pursue. KLT Telecom has $186.9 million
invested in DTI. For additional information regarding DTI, see the
Telecommunications-DTI Holdings, Inc. and subsidiaries section under
the KLT Inc. Business Overview in the attached Management's Discussion
and Analysis.
18
Consolidated Pro forma Information
The following unaudited pro forma consolidated results of operations
are presented as if the acquisition of an additional ownership
interest in DTI had been made at January 1, 2000. No pro forma
adjustments to net income are required after February 8, 2001.
Three Months Ended
September 30, 2000
(thousands)
Revenues $381,242
EPS
Net income $ 81,618
Eliminate DTI recorded operating loss -
Add DTI operating loss on a 100% basis (11,007)
Other adjustments (678)
Pro forma net income $ 69,933 $1.13
Year to Date September 30
2001 2000
(thousands)
Revenues $1,130,310 $876,345
EPS EPS
Income before extraordinary item and
Cumulative effect of changes in
accounting principles $ 88,792 $108,933
Eliminate DTI recorded operating loss 18,819 8,876
Add DTI operating loss on a 100% basis (22,415) (28,978)
Other adjustments (1,138) (2,034)
Pro forma loss before extraordinary
item and cumulative effect of
changes in accounting principles 84,058 $1.36 86,797 $1.40
Cumulative effect to January 1, 2000
of changes in accounting principles,
net of income taxes - - 30,073 0.49
DTI's early extinguishment of debt, net of
income taxes and minority interests 50,695 0.82 - -
Pro forma net income $ 134,753 $2.18 $116,870 $1.89
The unaudited pro forma consolidated results of operations are not
necessarily indicative of the combined results that would have
occurred had the acquisition occurred on those dates, nor is it
indicative of the results that may occur in the future.
19
9. SALE OF EQUITY INVESTMENTS
Sale of KLT Investments II Inc.'s Ownership of Downtown Hotel Group
On May 31, 2001, KLT Investments II Inc. sold its 25% ownership of
Kansas City Downtown Hotel Group, L.L.C. for total proceeds of $3.8
million resulting in a $2.2 million gain before income taxes. The
after income tax gain on the sale was $1.4 million ($0.02 per share).
Sale of KLT Gas Properties
On June 28, 2001, KLT Gas sold its 50% ownership in Patrick KLT Gas,
LLC for total proceeds of $42.3 million resulting in a $20.1 million
gain before income taxes. The after income tax gain on the sale was
$12.0 million ($0.19 per share).
10. NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 142 - Goodwill and Other Intangible Assets
The Financial Accounting Standards Board (FASB) has issued SFAS No.
142 - Goodwill and Other Intangible Assets. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. The Company will
adopt SFAS 142 on January 1, 2002. Under the new pronouncement,
goodwill will be assigned to reporting units and an initial impairment
test (comparison of the fair value of a reporting unit to its carrying
amount) will be done on all goodwill within six months of initially
applying the statement and then at least annually, thereafter. We
have not yet quantified the effects of adopting SFAS 142 on the
Company's financial condition and results of operations. At September
30, 2001, goodwill reported on the Consolidated Balance Sheet totaled
$98.0 million.
SFAS No. 143 - Accounting for Asset Retirement Obligations
FASB has issued SFAS No. 143 - Accounting for Asset Retirement
Obligations. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. The Company will adopt SFAS 143 on January 1, 2003.
Under the new pronouncement, an entity must recognize as a liability,
the fair value of an asset retirement obligation including nuclear
decommissioning costs. We have not yet quantified the effect of
adopting SFAS 143 on the Company's financial conditions.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Great Plains Energy Incorporated
Effective October 1, 2001, KCPL completed its corporate reorganization
creating a holding company structure. GPE became the holding company
of the following subsidiaries:
- - KCPL, a leading regulated provider of electricity in the Midwest;
- - GPP, a competitive generator that will sell to the wholesale
market; and
- - KLT Inc., a national investment company focusing on energy-related
ventures that are unregulated with high growth potential.
In implementing this strategy, the Company is focused on:
- - Providing reliable, low-cost electricity to retail customers;
- - Acquiring and investing in generation to serve the wholesale
market;
- - Pursuing high growth, unregulated business opportunities;
- - Managing the Company as a portfolio of both regulated and
unregulated, energy-related and growth businesses; and
- - Investing in a diverse group of people in recognition that the
Company's success is dependent upon the skills and expertise of its
people.
After October 1, 2001, all outstanding KCPL shares are honored on a
share for share basis as GPE shares. The new GPE trading symbol "GXP"
replaces the KCPL trading symbol "KLT" and is traded on the New York
Stock Exchange.
The information reported in this report is through September 30, 2001,
and thus is for KCPL prior to the reorganization to GPE. The
following discussion and analysis by management focuses on those
factors that had a material effect on the consolidated financial
condition and results of operations for the three months ended and
year to date September 30, 2001, compared to the three months ended
and year to date September 30, 2000. The discussion should be read in
conjunction with the accompanying Consolidated Financial Statements,
Notes and especially Note 3 - Segment and Related Information which
summarizes the income statement by segment.
21
Consolidated Earnings Overview
Three Months
Ended Year to Date
September 30 September 30
2001 2000 2001 2000
Earnings per share (EPS) summary
KCPL
Excluding cumulative effect $ 0.96 $ 0.70 $ 1.28 $ 1.13
Cumulative effect of changes in
pension accounting - - - 0.49
KCPL EPS 0.96 0.70 1.28 1.62
KLT Inc.
Excluding extraordinary item (0.06) 0.78 0.19 0.81
Extraordinary item:
Early extinguishment of debt - - 0.26 -
KLT Inc. EPS (0.06) 0.78 0.45 0.81
HSS EPS (0.01) (0.17) (0.06) (0.20)
Reported Consolidated EPS $ 0.89 $ 1.31 $ 1.67 $ 2.23
On February 1, 2001, DTI completed a tender offer for 50.4% of its
outstanding senior discount notes. This transaction resulted in KLT
Inc. reporting on an equity basis a $15.9 million ($0.26 per share)
extraordinary item for the gain on the early extinguishment of debt
year to date September 30, 2001.
Effective January 1, 2000, KCPL changed its methods of amortizing
unrecognized net gains and losses and determination of expected return
related to its accounting for pension expense. Accounting principles
required the Company to record the cumulative effect of these changes
increasing common stock earnings year to date September 30, 2000, by
$30.1 million ($0.49 per share). Adoption of the new methods of
accounting for pensions will lead to greater fluctuations in pension
expense in the future. The portions of the cumulative effect of
pension accounting changes attributable to KLT Inc. and HSS are
immaterial and, therefore, were not allocated to these subsidiaries.
For further discussion regarding each segment's contribution to
consolidated EPS, see its respective Earnings Overview section below.
KCPL Operations
KCPL Business Overview
KCPL, a regulated utility, consists of two business units - generation
and delivery. Dividing into two business units has provided KCPL the
opportunity to reexamine the businesses' internal processes in order
to operate more efficiently and create additional value for
shareholders.
The generation business has over 3,700 megawatts of generating
capacity, including Hawthorn No. 5. The rebuild of the boiler at
Hawthorn No. 5 is complete. The unit was returned to commercial
operation on June 20, 2001. During the third quarter of 2001, KCPL
completed a $200 million, five-year operating lease agreement for five
combustion turbines that will add 385 megawatts of peaking capacity.
Site preparation will begin next year for the arrival of the first
combustion turbine in 2003. Some or all of the units may be
transferred to GPP. If transferred, a significant portion of the
output from some of these units may be sold to KCPL.
22
The delivery business consists of transmission and distribution that
serves over 472,000 customers at September 30, 2001, and experiences
annual load growth of approximately 2% to 3% through increased
customer usage and additional customers. Rates charged for
electricity are currently below the national average. Additionally,
there is a moratorium on changes to Missouri retail rates until March
2002.
KCPL has an obligation, under FERC Order 2000, to join a Federal Energy
Regulatory Commission (FERC) approved Regional Transmission Organization
(RTO) by December 2001. RTOs combine regional transmission operations of
utility businesses into an organization that schedules transmission
services and monitors the energy market to ensure regional
transmission reliability and non-discriminatory access. KCPL has been
considering its options for joining an RTO. FERC has indicated a
desire for the numerous RTOs that have been formed and are in the
process of being formed to consolidate into four RTOs covering the
entire nation. To accomplish that objective, FERC directed an
Administrative Law Judge to mediate a potential consolidation among
the various RTOs. The Administrative Law Judge has submitted a report
to the FERC, but FERC has not yet ruled on the issue.
KCPL Earnings Overview
KCPL contributed EPS of $0.96 for the three months ended September 30,
2001, compared to $0.70, for the same period in 2000, and $1.28 year
to date September 30, 2001, compared to $1.13, excluding the
cumulative effect of changes in pension accounting, for the same
period in 2000. The following table and discussion highlight
significant factors affecting the changes in KCPL's EPS contribution
for the periods indicated.
September 30, 2001 compared to September 30, 2000
Three Months
Ended Year to Date
Increased (decreased) revenues $(0.01) $ 0.17
Decreased quantity of energy
and capacity purchased 0.19 0.21
Decreased other operation and
maintenance including 0.11 0.05
administrative and general
expenses
Increased interest charges (0.05) (0.14)
Increased depreciation (0.03) (0.09)
Other (see discussion below) 0.05 (0.05)
Total $ 0.26 $ 0.15
Contributing to the other factors impacting the change in KCPL's EPS
are the following:
- Increased expenses because of the write-off of $2.0 million of
billings incurred after January 1, 2001, to one of KCPL's larger
customers because of its Chapter 11 bankruptcy filing on February 7,
2001. Any recoveries from this bankruptcy proceeding will be recorded
as income when received.
- Decreased gain on property due to a gain on the sale of unit train
coal cars year to date September 30, 2000.
- Fossil fuel and purchased power prices decreased for the three
months ended and increased year to date September 30, 2001, compared
to the same periods of 2000.
23
KCPL Megawatt-hour (mwh) Sales and Electric Sales Revenues
September 30, 2001 compared to September 30, 2000
Three Months Ended Year to Date
Mwh Revenues Mwh Revenues
Retail Sales: (revenue change in millions)
Residential (4) % $ (4.4) 4 % $ 4.2
Commercial - 1.2 3 % 7.5
Large Industrial
Customer (99) % (7.7) (80) % (15.5)
Industrial - Other (5) % (1.3) (4) % (1.3)
Other 6 % - 3 % 0.1
Total Retail (5) % (12.2) (2) % (5.0)
Sales for Resale:
Bulk Power Sales 144 % 11.1 62 % 20.0
Other (5) % (0.3) (1) % -
Total 7 % (1.4) 5 % 15.0
Other revenues 0.3 1.9
KCPL electric sales revenues $ (1.1) $ 16.9
Residential mwh sales decreased for the three months ended September
30, 2001, compared to the same period of 2000, primarily due to milder
weather. The decrease was more than offset for year to date September
30, 2001, compared to the same period of 2000, by colder winter
weather and continued load growth. Load growth consists of higher
usage-per-customer and the addition of new customers. Mwh sales to
one Large Industrial Customer decreased for the three months ended and
year to date September 30, 2001, compared to the the same periods of
2000, due to its February 7, 2001, bankruptcy, and the closing of its
Kansas City, Missouri facilities on May 25, 2001. Industrial - Other
mwh sales decreased primarily due to economic conditions affecting
certain industrial customers. Less than 1% of revenues include an
automatic fuel adjustment provision.
Bulk power sales vary with system requirements, generating unit and
purchased power availability, fuel costs and requirements of other
electric systems. Increased bulk power mwh sales for both the three
months ended and year to date September 30, 2001, compared to the same
periods in 2000, were primarily attributable to the availability of
Hawthorn No. 5 and the loss of the large industrial customer discussed
above. The increase in bulk power sales year to date September 30,
2001, compared to the same period of 2000, was partially offset by
additional residential and commercial sales resulting from colder
winter weather during the first three months of 2001 and continued
load growth. The average prices per mwh of bulk power sales were down
10% for the three months ended and up 10% year to date September 30,
2001, compared to the same periods of 2000.
KCPL's share of LaCygne No. 1 unit's capacity has been temporarily
reduced by approximately 100 megawatts because of the failure, in mid-
July 2001, of one of the two air heaters. KCPL is replacing the 30-
year old air heaters during a 6-week fall outage that began November
2, 2001, at an approximate capitalized cost to KCPL of $2 million.
KCPL anticipates that other units will replace the lost capacity
during the outage. However, this outage will reduce bulk power sales
in the fourth quarter of 2001.
KCPL Fuel and Purchased Power
Fuel costs decreased $1.6 million for the three months ended September
30, 2001, compared to the same period of 2000, due to decreased
generation from natural gas partially offset by increased generation
from coal and a slight decrease in the cost per mmBtu of coal. Fuel
costs increased $5.5 million year to date September 30, 2001, compared
to the same period of 2000, due to increased generation from coal and
the higher cost per mmBtu of natural gas partially offset by decreased
generation from natural gas. Natural gas has a significantly higher
cost per mmBtu than coal or nuclear
24
fuel. Total generation increased 14% for the three months ended and
8% year to date September 30, 2001, compared to the same periods of 2000.
Fossil plants represent about two-thirds of total generation and the
nuclear plant about one-third. Nuclear fuel costs per mmBtu remain
substantially less than the mmBtu price of coal. KCPL expects the
price of nuclear fuel to remain fairly constant through the year 2003.
KCPL's procurement strategies continue to provide delivered coal costs
below the regional average.
Purchased power expenses decreased $21.9 million for the three months
ended and $19.5 million year to date September 30, 2001, compared to
the same periods of 2000. Mwh's purchased decreased 47% for the three
months ended and 22% year to date September 30, 2001, compared to the
same periods of 2000. The decreases were primarily due to Hawthorn
No. 5 returning to commercial operation in June 2001 which contributed
to an increase in the availability of KCPL's generating units and a
decline in capacity purchased. Purchased power prices were down 14%
for the three months ended September 30, 2001, compared to the same
period of 2000, but the decrease in prices for the quarter did not
completely offset the increase in prices during the first half of
2001. The cost per mwh for purchased power is significantly higher
than the fuel cost per mwh of generation.
KCPL Other Operation and Maintenance Expenses
KCPL's other operation and maintenance expense decreased $11.2 million
for the three months ended and $5.1 million year to date September 30,
2001, compared to the same periods of 2000. The primary reasons for
the decrease in KCPL's other operation and maintenance expense were:
- - reductions in replacement power insurance for the summer months
because of the availability of Hawthorn No. 5 during the summer of
2001;
- - less customer information system software consulting in 2001;
- - less advertising in 2001; and
- - decreased net periodic pension cost due to $9 million year to date
credits in 2000 increasing to $12 million year to date credits in
2001. See discussion below.
KCPL's pension benefit accounting principles, as discussed in the
December 31, 2000, report on Form 10-K, can result in large
fluctuations in pension expenses. Excluding the Wolf Creek pension
plan, the fair value of the other pension plan assets at September 30,
2001, decreased significantly from the September 30, 2000, plan year.
This decrease will cause the expected return on plan assets to
decrease approximately $15 million in 2002, an unfavorable change to
net periodic benefit cost.
KCPL Interest Charges
KCPL's interest charges increased $5.2 million for the three months
ended and $13.7 million year to date September 30, 2001, compared to
the same periods of 2000, primarily because of an increase in long-
term debt interest expense and a decrease in the allowance for
borrowed funds used during construction.
The increase in long-term interest expense is reflective of higher
average levels of outstanding long-term debt for the three months ended
and year to date September 30, 2001, compared to the same periods of
2000. The higher average levels of debt primarily reflect $200 million
of unsecured, floating rate medium-term notes issued by KCPL in March
2000, and $250 million of unsecured, fixed-rate senior notes issued in
December 2000, partially offset by $60.5 million of scheduled debt
repayments by KCPL since September 30, 2000. The increase in interest
expense was partially offset by lower interest rates.
Allowance for borrowed funds used during construction decreased $2.9
million for the three months ended and $0.3 million year to date
September 30, 2001, compared to the same periods of 2000,
25
because of decreased construction work in progress due to the completion
of the Hawthorn No. 5 rebuild.
Short-term debt interest expense decreased for the three months ended
and year to date September 30, 2001, compared to the same periods of
2000, due to lower interest rates partially offset by higher levels of
commercial paper outstanding.
Wolf Creek
Wolf Creek is one of KCPL's principal generating units, representing
about 15% of KCPL's generating capacity. The plant's operating
performance has remained strong over the last three years,
contributing about 30% of KCPL's annual mwh generation while operating
at an average capacity of 93%. Furthermore, Wolf Creek has the lowest
fuel cost per mmBtu of any of KCPL's generating units.
KCPL accrues the incremental operating, maintenance and replacement
power costs for planned outages evenly over the unit's operating
cycle, normally 18 months. As actual outage expenses are incurred,
the refueling liability and related deferred tax asset are reduced.
Wolf Creek's next refueling and maintenance outage is scheduled for
the spring of 2002 and is estimated to be a 30-day outage.
Ownership and operation of a nuclear generating unit exposes KCPL to
risks regarding decommissioning costs at the end of the unit's life
and to potential retrospective assessments and property losses in
excess of insurance coverage.
Hawthorn No. 5
On June 20, 2001, Hawthorn No. 5 was returned to commercial operation.
The coal-fired unit has a capacity of 575 megawatts and was rebuilt
following a February 1999 explosion that destroyed the boiler. KCPL
has been recognized nationally, including mention in the National
Energy Policy Report sent to President Bush, for its use of state-of-
the-art pollution control technology in the rebuilt Hawthorn No. 5.
Under KCPL's property insurance coverage, with limits of $300 million,
KCPL received an additional $30 million in insurance recoveries year
to date September 30, 2001, increasing the total insurance recoveries
received to date to $160 million. The recoveries have been recorded
in Utility Plant - accumulated depreciation on the consolidated
balance sheet. Expenditures, excluding capitalized interest, for
rebuilding Hawthorn No. 5 were $35.6 million in 1999, $207.6 million
in 2000 and are projected to be about $73 million in 2001, of which
$58.1 million were incurred year to date September 30, 2001. These
amounts have not been reduced by the insurance proceeds received to
date or future proceeds to be received.
KLT Inc. Operations
KLT Inc. Business Overview
KLT Inc., an unregulated subsidiary, pursues business ventures in
higher growth businesses. Existing ventures include investments in
telecommunications, natural gas development and production, energy
services and affordable housing limited partnerships. KCPL's
investment in KLT Inc. was $150.0 million at September 30, 2001, and
$119.0 million at December 31, 2000.
Telecommunications - DTI Holdings, Inc. and Subsidiaries (DTI)
At December 31, 2000, KLT Telecom, a subsidiary of KLT Inc., owned 47%
of DTI (acquired in 1997), a facilities-based telecommunications
company. Through utilization of a $94 million loan (10% interest
rate) to DTI Holdings, Inc. from KLT Telecom, DTI successfully
completed a tender offer to repurchase a portion of its long-term debt
on February 1, 2001, reducing interest costs. On February 8, 2001,
KLT Telecom increased its ownership of DTI from 47 percent to 84
percent. See Note 8 to the Consolidated Financial Statements for
further information.
26
The strategic design of the DTI network allows DTI to offer reliable,
high-capacity voice and data transmission services, on a region-by-
region basis, to primary carriers and end-user customers who seek a
competitive alternative to existing providers. DTI's network
infrastructure is designed to provide reliable customer service
through back-up power systems, automatic traffic re-routing and
computerized automatic network monitoring. If the network experiences
a failure of one of its links, the routing intelligence of the
equipment transfers traffic to the next choice route, thereby ensuring
delivery without affecting customers. DTI currently provides services
to other communication companies including Tier 1 and Tier 2 carriers.
DTI also provides private line services to targeted business and
governmental end-user customers. All of DTI's operations are subject
to federal and state regulations.
Responding to the current challenges of the telecommunications
industry, DTI has more narrowly focused its strategy. In order to
reduce the capital requirements, DTI will only provide connectivity in
secondary and tertiary markets in five states. In addition, DTI is
evaluating means to enhance its business by utilizing the significant
metropolitan fiber assets that it has in its current regional network
to provide metro access services, including high bandwidth services
over an Ethernet based network targeted at enterprise customers (i.e.,
Gigabit Ethernet services). DTI estimates that its total additional
cash funding requirements subsequent to September 30, 2001, necessary
to implement its refocused and downsized business plan and to fund
existing commitments and payables, will be approximately $28 million
over the next 15 months.
KLT Telecom had committed to provide or arrange a revolving credit
facility for Digital Teleport, Inc., a subsidiary of DTI Holdings,
Inc., in the amount of $75.0 million. A credit facility with bank
lenders has not been possible to obtain due to, among other things,
the downturn in the telecommunications industry. The DTI Holdings and
Digital Teleport Boards of Directors confirmed, in July 2001, that KLT
Telecom is not obligated to make any other future loans to Digital
Teleport. This confirmation was based on the downturn in the
telecommunications industry and the resulting decline in Digital
Teleport's prospects and financial condition. KLT Telecom, in
September 2001, under a credit facility agreed to lend up to $5.0
million subject to Digital Teleport meeting specified conditions. As
of September 30, 2001, Digital Teleport had borrowed $1.5 million of
the $5.0 million. Under these credit facilities, KLT Telecom has
loaned Digital Teleport a total of $47.0 million ($1.0 million was
loaned on October 25, 2001). These loans are secured, to the extent
permitted by law or agreement, by Digital Teleport's assets. DTI is
dependent upon KLT Telecom's continued funding of Digital Teleport.
KLT Telecom will not provide additional funding to Digital Teleport
unless in its sole judgement Digital Teleport meets certain specified
conditions.
Because of the downturn in the telecommunication industry, an
impairment analysis was performed on the DTI, June 30, 2001, assets in
accordance with SFAS 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, which requires
that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Based upon current business strategies, the
analysis indicated there was no impairment as defined in SFAS 121.
DTI is actively exploring its strategic alternatives including a
merger, sale of assets, bankruptcy, and all other types of
recapitalization. DTI has not yet determined which alternative, or
combination thereof, it will pursue. KLT Telecom has $186.9 million
invested in DTI including the loans to date detailed above, interest
accrued on these loans and goodwill recorded.
Natural Gas Development and Production - KLT Gas
KLT Gas' business strategy is to acquire and develop early stage
coalbed methane properties and then divest properties in order to
create shareholder value. KLT Gas believes that coalbed methane
production provides an economically attractive alternative source of
supply to meet the growing demand for natural gas in North America and
has built a knowledge base in coalbed methane production and
27
reserves evaluation. Therefore, KLT Gas focuses on coalbed methane -
a niche in the natural gas industry where it believes its expertise
gives it a competitive advantage. Because it has a longer, predictable
reserve life, coalbed methane is inherently lower risk than conventional
gas exploration.
Although gas prices have been volatile recently, KLT Gas
continues to believe that the long-term future price scenarios for
natural gas appear strong. Environmental concerns and the increased
demand for natural gas for new electric generating capacity are
contributing to this projected growth in demand.
KLT Gas' properties are located in Colorado, Texas, Wyoming, Kansas,
and Nebraska. These leased properties cover approximately 210,000
undeveloped acres. The development of this acreage is in accordance
with KLT Gas' exploration plan and capital budget. The timing of the
development may vary from the plans based upon obtaining the required
environmental and regulatory approvals and permits.
Energy Management Service - Strategic Energy LLC (SEL)
SEL is an energy management services provider that operates in several
deregulated electricity markets, including Pennsylvania, Southern
California, Ohio and New York. Recently, SEL has expanded its
geographic reach by entering into additional deregulated electricity
markets in Massachusetts and Texas. In 2001, in exchange for
approximately $4.7 million preferred stock ownership in an energy
services company, the ownership in SEL was increased from
approximately 72% to approximately 83%.
SEL acts as an energy manager in deregulated markets on behalf of
approximately 15,000 commercial and small manufacturing customers.
SEL enters into one to five year contracts with customers to supply
energy and manage their energy needs. For this service they receive
an ongoing management fee plus the contracted price for the
electricity and natural gas. SEL will phase out its natural gas
retail service in the fourth quarter of 2001.
SEL's suppliers and customer base are very diverse. Suppliers include
small and large energy generators across the country. Customers
include numerous Fortune 500 companies, school districts, and
governmental entities. Based on current signed contracts and expected
usage, SEL forecasts a peak load of 1,433 megawatts. The largest
concentration of the forecasted load, 568 megawatts, is in
Pennsylvania.
Investments in Affordable Housing Limited Partnerships - KLT
Investments
At September 30, 2001, KLT Investments had $87.1 million in affordable
housing limited partnerships. About 69% of these investments were
recorded at cost; the equity method was used for the remainder. Tax
expense is reduced in the year tax credits are generated. The
investments generate future cash flows from tax credits and tax losses
of the partnerships. The investments also generate cash flows from
the sales of the properties (estimated residual value). For most
investments, tax credits are received over ten years. A change in
accounting principle relating to investments made after May 19, 1995,
requires the use of the equity method when a company owns more than 5%
in a limited partnership investment. Of the investments recorded at
cost, $58.3 million exceed this 5% level but were made before May 19,
1995.
On a quarterly basis, KLT Investments completes a valuation study of
its cost method investments in affordable housing by comparing the
cost of those properties to the total of projected residual value of
the properties and remaining tax credits to be received. Estimated
residual values are based on studies performed by an independent firm.
Based on the latest valuation study, KLT Investments reduced its
investments in affordable housing limited partnerships by about $8
million during the third quarter of 2001. KLT Investments estimates
that additional reductions in affordable housing
28
investments will approximate $5 million in the fourth quarter of 2001
and $9 million, $12 million, $8 million and $7 million, for the years
2002 through 2005, respectively. Even after these reductions, earnings
from affordable housing are expected to be positive for the next five
years.
These projections are based on the latest information available but
the ultimate amount and timing of actual reductions made could be
significantly different from the above estimates.
KLT Inc. Earnings Overview
The following table and discussion highlight significant factors
affecting KLT Inc.'s effect on consolidated EPS for the three months
ended and year to date September 30, 2001, and September 30, 2000.
Three Months
Ended Year to Date
September 30 September 30
2001 2000 2001 2000
Earnings per share (EPS) summary
KLT Inc.
SEL $ 0.16 $ 0.05 $ 0.28 $ 0.09
DTI
Operations subsequent
to 2/8/01 (0.13) - (0.31) -
Gain on early extinguishment
of debt and equity losses
prior to majority
ownership - - 0.26 (0.14)
KLT Gas
Operations - 0.04 0.03 0.12
Sale of gas properties - 0.62 0.19 0.62
Realized loss on CellNet stock - - - (0.05)
KLT Investments (0.02) 0.06 0.09 0.18
Other (0.07) 0.01 (0.09) (0.01)
KLT Inc. EPS $(0.06) $ 0.78 $ 0.45 $ 0.81
SEL's increase in earnings per share for the three months ended and
year to date September 30, 2001, compared to the same periods of 2000,
is due to continued strong growth in its electric energy management
business and a significant increase over the prior year periods in
wholesale bulk power sales, which have a considerably higher gross
margin (revenues less cost of energy supplied) than SEL's retail
electric sales.
In February 2001, KLT Telecom increased its investment in DTI from 47%
to 84%, which required a change in the method of accounting from
equity to consolidation. DTI's loss per share on operations
subsequent to 2/8/01 primarily reflects increased personnel costs
mostly due to increased marketing and sales efforts and higher
depreciation and amortization expenses due to increasing amounts of
its fiber optic network being placed into service.
DTI's $0.26 EPS contribution prior to the change in ownership resulted
from the net impact of the gain from early extinguishment of $193
million of senior discount notes by DTI, reduced by the losses
previously recorded by DTI but not reflected by KLT Telecom. KLT
Telecom stopped recording equity losses on its investment in DTI after
the second quarter of 2000 because at June 30, 2000, its investment
had been written down to zero. The gain from early extinguishment is
reflected in the consolidated financial statements as an extraordinary
item.
29
During June 2001, KLT Gas sold its 50% equity ownership in Patrick KLT
Gas, LLC for $42.3 million, resulting in an after tax gain of $12.0
million ($0.19 per share). During September 2000, KLT Gas sold
producing natural gas properties to Evergreen Resources, Inc. for
$145.4 million, resulting in an after tax gain of $38.6 million ($0.62
per share).
During the third quarter of 2001, KLT Investments reduced its
investments in affordable housing limited partnerships by $8.1 million
($0.08 per share). Also during the third quarter of 2001, KLT Energy
Services recorded a mark-to-market, unrealized loss of $5.2 million
($0.05 per share) on its investment in common stock of a publicly
traded company, which is reflected in Other in the table above.
KLT Inc. Revenues
September 30, 2001 compared to September 30, 2000
Three Months
Ended Year to Date
Increase (Decrease) (millions)
DTI $ 4.6 $ 11.6
SEL
Electric - Retail 86.4 154.7
Electric - Bulk Power 25.7 50.5
Sales
Gas (6.4) 4.5
KLT Gas (10.5) (27.1)
Total $ 99.8 $ 194.2
KLT Inc. acquired a majority ownership in DTI in February 2001. Prior
to this, the investment in DTI was recorded on an equity basis.
SEL's retail revenues increased for the three months ended and year to
date ended September 30, 2001, compared to the same periods of 2000,
due to continued strong growth in its electric energy management
business. SEL currently serves approximately 15,000 commercial and
small manufacturing customers, an increase of 8,000 customers from the
beginning of 2001. In addition, based on current signed contracts and
expected usage, SEL forecasts a peak load of 1,433 megawatts compared
to 485 megawatts under management at the beginning of 2001.
SEL has an option to purchase up to 270 megawatts of power at $21 per
mwh through the end of 2001. Almost all of the bulk power sales
increase for the three months ended and year to date September 30,
2001, compared to the same periods of 2000, is related to large block
sales of the power purchased under the option. SEL also purchases
energy in the wholesale markets to meet its customers' energy needs.
On occasion, SEL must purchase small blocks of power prior to the
sales contract in order to quote stable pricing to potential new
customers. Power purchased in excess of retail sales is sold in the
wholesale markets.
SEL's gas sales decreased for the three months ended September 30,
2001, compared to the same period of 2000, because SEL began to phase
out its retail natural gas service. SEL intends to complete the phase
out in the fourth quarter of 2001.
KLT Gas revenues decreased for the three months ended and year to date
September 30, 2001, compared to the same periods of 2000, primarily
due to the sale of KLT Gas properties in September and October 2000.
Also contributing to the three months ended and year to date decreases
were declines in production and in the average price per MCF of gas
sold, particularly during the three months ended September 30, 2001,
and transactions associated with gas hedging activites. KLT Gas
30
unwound the majority of its gas hedge derivatives with a swap
transaction during the second quarter of 2001. The fair market value
of the swap has been recorded in gas revenues.
Gain on Property
KLT Inc.'s gain on property year to date September 30, 2001, includes
a $20.1 million before tax gain on KLT Gas' sale of its 50% equity
ownership in Patrick KLT Gas, LLC. KLT Inc.'s gain on property for
the three months ended and year to date September 30, 2000, includes a
$60.4 million before tax gain on KLT Gas' sale of producing natural
gas properties to Evergreen Resources, Inc.
Other Income and Expenses
The unfavorable changes in KLT Inc.'s other income and expenses for
the three months ended and year to date September 30, 2001, compared
to the same periods in 2000, were primarily due to KLT Investments
Inc.'s $8.1 million reduction in affordable housing limited
partnerships and a $5.2 million mark-to-market, unrealized loss from
KLT Energy Services' investment in the common stock of a
publicly-traded company. Year to date September 30, 2000, included
$4.8 million of realized losses on the write off of an investment in
CellNet in 2000.
KLT Inc. Taxes
KLT Inc. accrued tax credits of $6.5 million and $19.5 million for the
three months ended and year to date September 30, 2001, and $7.0
million and $20.7 million for the three months ended and year to date
September 30, 2000. These tax credits are related to investments in
affordable housing limited partnerships and natural gas properties.
HSS Operations
HSS, an unregulated subsidiary, pursues business ventures primarily in
residential services. In 2001, HSS increased its ownership to 72%
from 49% in RSAE, a consumer services company in Atlanta, Georgia,
which required a change in the method of accounting for RSAE from
equity to consolidation. Additionally, Worry Free Service, Inc., a
wholly owned subsidiary of HSS, assists residential customers in
obtaining financing primarily for heating and air conditioning
equipment.
KCPL's investment in HSS was $46.9 million at September 30, 2001, and
$46.3 million at December 31, 2000. HSS' loss year to date September
30, 2001, totaled $3.7 million ($0.06 per share) compared to a loss of
$12.7 million ($0.20 per share) year to date September 30, 2000. HSS'
decreased loss year to date September 30, 2001, compared to 2000, was
primarily due to a write-down of its investment in RSAE during 2000.
At September 30, 2001, the Company's accumulated losses were $21.7
million on its investment in HSS. HSS' consolidated assets increased
to $55.1 million at September 30, 2001, compared to $25.3 million at
December 31, 2000, reflecting the consolidation of RSAE in 2001.
Great Plains Power Incorporated (GPP)
GPP will focus on fossil fuel-fired electric generation in the central
part of the U.S. GPP is considering building, in the Midwest region,
one to five coal-fired plants ranging from 500 to 900 megawatts each.
One of the units, Weston Bend I, is anticipated to be on line in 2006.
GPP announced an agreement with the boiler and air quality control
equipment vendor and construction firm, Babcock and Wilcox, and the
design and engineering firm, Burns and McDonnell, to conduct the
design and development study for Weston Bend I, a coal-fired plant
near Weston, Missouri. This agreement reunites the same team that
rebuilt Hawthorn No. 5.
31
Other Consolidated Discussion
Significant Consolidated Balance Sheet Changes
(September 30, 2001 compared to December 31, 2000)
- Receivables increased $106.3 million primarily due to strong growth
in SEL's electric energy management business and the seasonal nature
of the utility business.
- Equity securities decreased $18.3 million primarily due to KLT Gas'
sale of $12.3 million of stock in Evergreen Resources, Inc. and the
decline in the market value of an equity security that KLT Energy
Services, Inc. held.
- Telecommunications property of $386.2 million at September 30,
2001, resulted from KLT Telecom's purchase of an additional ownership
interest in DTI, which required a change in the method of accounting
for DTI from equity to consolidation.
- Gas property and investments decreased $12.3 million primarily due
to KLT Gas' sale of its 50% equity ownership in Patrick KLT Gas, LLC
partially offset by additions to gas property.
- Other nonutility property and investments decreased $18.6 million
due to the sale by KLT of its $1.6 million investment in the Downtown
Hotel Group, the sale of $8.1 million of various other investments and
the exchange of $4.7 million preferred stock in an energy services
company for an additional ownership in SEL.
- Combined electric utility plant and construction work in progress
increased $147.2 million primarily due to expenditures and capitalized
interest of $68.2 million at Hawthorn No. 5 to rebuild the boiler and
$92.2 million for other utility capital expenditures. The completion
of rebuilding the boiler at Hawthorn No. 5 resulted in a transfer of
$288.9 million from construction work in progress to electric plant.
- Goodwill increased $87.2 million due to increased goodwill at
September 30, 2001, of $61.2 million resulting from the consolidation
of DTI and an additional $2.9 million in goodwill recorded because of
increased ownership in SEL. An additional $23.1 million of goodwill
at September 30, 2001, relates to the consolidation of RSAE, resulting
from an increased ownership by HSS.
- Notes payable of $22.4 million includes $19.3 million of short-term
notes at September 30, 2001, relating to the consolidation of RSAE and
$3.1 million relating to short-term notes held by DTI.
- Commercial paper increased $137.6 million due to the repayment of
medium-term notes of $50 million and additional commercial paper
borrowings as expenditures exceeded cash receipts.
- Current maturities of long-term debt increased $274.2 million,
reflecting a $227.0 million increase in the current portion of KCPL's
medium-term notes offset by $50.0 million of maturing medium-term
notes, and $99.5 million borrowed under KLT Inc.'s bank credit
agreement. KLT Inc.'s bank credit agreement was repaid October 3,
2001, with proceeds from GPE's bridge credit facility which terminates
on February 28, 2002.
- Accounts payable decreased $24.2 million primarily due to the
timing of cash receipts and cash payments partially offset by strong
growth in SEL's electric energy management business.
- Accrued taxes increased $62.6 million primarily due to the timing
of income tax and property tax payments.
- Other current liabilities increased $36.2 million including $3.4
million at September 30, 2001, due to the consolidation of RSAE, $17.1
million because of SFAS 133 - Accounting for Derivative Instruments
and Hedging Activities, as amended, (See Note 6 to the Consolidated
Financial Statements) and $12.4 million at September 30, 2001, due to
the consolidation of DTI.
- Deferred telecommunications revenue of $45.6 million at September
30, 2001, is due to the consolidation of DTI. This deferred revenue
results from advances under contracts being deferred and then
recognized on a straight-line basis as revenue over the terms of the
contract. In many cases, recognition does not start until completion
of specified route segments.
32
Capital Requirements and Liquidity
The Company's liquid resources at September 30, 2001, included cash
flows from operations, $150 million of registered but unissued debt
securities, and $52.8 million of unused bank lines of credit. The
unused lines consisted of KCPL's short-term bank lines of credit.
KLT Inc.'s bank credit agreement was repaid October 3, 2001, with
proceeds from a new GPE bridge credit facility which terminates on
February 28, 2002, and has $9.0 million remaining available at October
3, 2001. On October 12, 2001, KCPL paid $40.8 million by issuing
commercial paper to purchase the Hawthorn No. 6 combustion turbine
unit from the lessor in accordance with the terms of the lease with KCPL.
The Company generated positive cash flows from operating activities
year to date September 30, 2001. Individual components of working
capital will vary with normal business cycles and operations, such as
the increase in receivables of $101.2 million year to date September
30, 2001, the reduction of accounts payable by $61.7 million and the
increase in accrued taxes of $60.2 million for the same period. Also,
the timing of the Wolf Creek outage affects the refueling outage
accrual, deferred income taxes and amortization of nuclear fuel.
Cash used for investing activities varies with the timing of utility
capital expenditures and purchases of investments and nonutility
property. Cash used for purchases of investments and nonutility
property increased year to date September 30, 2001, compared to the
same period of 2000, primarily reflecting cash paid by KLT Telecom for
additional ownership in DTI and additional telecommunications property
partially offset by investments in gas properties during the same
period of 2000. The note receivable from DTI prior to majority
ownership is reflected as an investing activity. See additional
discussion of DTI loan activity in the Telecommunications section of
the KLT Inc. Business overview. These amounts were partially offset
by cash received from the sale of KLT gas properties in the current
and prior year and the sale of securities in the current period.
Cash from financing activities increased year to date September 30,
2001, compared to the same period of 2000, primarily because short-
term borrowings increased $144.7 million year to date September 30,
2001, compared to a $16.6 million decrease for the same period of
2000. However, this change in short-term borrowings was partially
offset by a decrease in long-term debt issuances, net of repayments,
year to date September 30, 2001, compared to the same period of 2000.
The Company expects to meet day-to-day operations, construction
requirements (excluding new generating capacity and telecommunications
construction) and dividends with internally-generated funds. However,
the Company might not be able to meet these requirements with
internally-generated funds because of the effect of inflation on
operating expenses, the level of mwh sales, regulatory actions,
compliance with future environmental regulations and the availability
of generating units. The funds needed to retire $752 million of
maturing debt through the year 2005 will be provided from operations,
refinancings and/or short-term debt. The Company may issue additional
debt and/or additional equity to finance growth or take advantage of
new opportunities.
Environmental Matters
The Company's operations must comply with federal, state and local
environmental laws and regulations. The generation and transmission
of electricity produces and requires disposal of certain products and
by-products, including polychlorinated biphenyl (PCBs), asbestos and
other hazardous materials. The Federal Comprehensive Environmental
Response, Compensation and Liability Act (the Superfund law) imposes
strict joint and several liability for those who generate, transport
or deposit hazardous waste. In addition, the current owner of
contaminated property, as well as prior owners since the time of
contamination, may be liable for cleanup costs.
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The Company continually conducts environmental audits to detect
contamination and ensure compliance with governmental regulations.
However, compliance programs need to meet new and future environmental
laws, as well as regulations governing water and air quality,
including carbon dioxide emissions, nitrogen oxide emissions,
hazardous waste handling and disposal, toxic substances and the
effects of electromagnetic fields. Therefore, compliance programs
could require substantial changes to operations or facilities (see
Note 4 to the Consolidated Financial Statements).
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This disclosure is for the interim periods presented and should be
read in connection with the quantitative and qualitative disclosures
about market risk included in our 2000 annual report on Form 10-K.
The consolidated company is exposed to market risks associated with
commodity price and supply, interest rates and equity prices. Market
risks are handled in accordance with established policies, which may
include entering into various derivative transactions. In the normal
course of business, the Company also faces risks that are either non-
financial or non-quantifiable. Such risks principally include
business, legal, operational and credit risks and are not represented
in the following analysis.
Commodity Risk
KCPL has its forecasted coal requirements under contract for the year
2001. A portion of these coal requirements are subject to the market
price of coal. Because of the increased price of coal and additional
commitments, KCPL's coal commitments for 2001 have increased 16% to
$41.8 million since the 2000 annual report on Form 10-K was filed. A
hypothetical 10% increase in the price of coal would result in an
immaterial decrease in the year 2001 pretax earnings.
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PART II - OTHER INFORMATION
ITEM 2(a). CHANGES IN SECURITIES
On October 1, 2001, KCPL completed a corporate
reorganization creating a holding company structure.
Pursuant to and through an agreement and plan of merger
among KCPL, Great Plains Energy Incorporated (GPE) and
another wholly owned subsidiary of GPE, KCPL became the
wholly owned subsidiary of GPE. GPE became the holding
company and successor issuer for all of KCPL shares of (i)
Common Stock; (ii) 3.80% Cumulative Preferred Stock; (iii)
4.50% Cumulative Preferred Stock; (iv) 4.20% Cumulative
Preferred Stock; and (v) 4.35% Cumulative Preferred Stock.
GPE replaced KCPL as the listed entity on the New York Stock
Exchange. The new GPE trading symbol GXP replaces the old
KCPL symbol KLT. With the exception of the change in issuer,
all other designations, preferences, rights, qualification,
restrictions, and limitations pertaining to each class of
stock remain the same.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
3-(i) Restated Articles of Consolidated as amended
October 1, 2001
10 Credit Agreement between KLT Telecom Inc. and
Digital Teleport, Inc. dated as of September 25,
2001
REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities
and Exchange Commission during the nine months ended
September 30, 2001.
A report on Form 8-K was filed October 1, 2001, by
Kansas City Power & Light Company announcing the completion
of its corporate restructuring.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
KANSAS CITY POWER & LIGHT COMPANY
Dated: November 9, 2001 By: /s/Bernard J. Beaudoin
(Bernard J. Beaudoin)
(Chief Executive Officer)
Dated: November 9, 2001 By: /s/Neil Roadman
(Neil Roadman)
(Principal Accounting Officer)